Generally Accepted Accounting
Practice
GAAP Principle Explanation
Business Entity Concept The business functions as a separate financial entity from its
owners, or any other business or organisation. Financial affairs
of the business and the owner should be kept separately.
Historical Cost Concept All assets should be valued at historical cost. Assets are
recorded in the accounts of the business at the amount that
was ORIGINALLY PAID for them. Market value fluctuates over
time, but the cost is determined objectively.
Going Concern Concept The financial statements of a business should be prepared
based on the assumption that the business will continue to
operate in the foreseeable future. Assets are valued according
to the Historical Cost Concept, thus the value pf the assets will
suffer if the business is to close, because they would have to
be sold under unfavourable circumstances.
Matching Concept Income & expenses are recognised & recorded in the correct
time period. They are matched to the period in which they
are earned or incurred, irrespective of whether the income
has been received or the expenses actually paid. expenses
should also be matched to the same accounting period as the
income that they helped generate.
Materiality Principle All significant information must be included in the financial
statements, while items which are insignificant need not be
disclosed in detail. The aim is to ensure that financial
statements should not become unnecessary long & confusing
or difficult to read. Determining the materiality of an item
depends on the size % nature of the item.
Practice
GAAP Principle Explanation
Business Entity Concept The business functions as a separate financial entity from its
owners, or any other business or organisation. Financial affairs
of the business and the owner should be kept separately.
Historical Cost Concept All assets should be valued at historical cost. Assets are
recorded in the accounts of the business at the amount that
was ORIGINALLY PAID for them. Market value fluctuates over
time, but the cost is determined objectively.
Going Concern Concept The financial statements of a business should be prepared
based on the assumption that the business will continue to
operate in the foreseeable future. Assets are valued according
to the Historical Cost Concept, thus the value pf the assets will
suffer if the business is to close, because they would have to
be sold under unfavourable circumstances.
Matching Concept Income & expenses are recognised & recorded in the correct
time period. They are matched to the period in which they
are earned or incurred, irrespective of whether the income
has been received or the expenses actually paid. expenses
should also be matched to the same accounting period as the
income that they helped generate.
Materiality Principle All significant information must be included in the financial
statements, while items which are insignificant need not be
disclosed in detail. The aim is to ensure that financial
statements should not become unnecessary long & confusing
or difficult to read. Determining the materiality of an item
depends on the size % nature of the item.
